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Thinking of Renovating?

With market interest rates at historically low levels it can be a great time to take advantage of them to do improvements to your home.

Renovating comes with a big warning sign however.  In my experience most people end up spending twice what they originally planned. This is mainly due to plan and specification changes, hidden problems behind the walls and insufficiently detailed quotes.  It’s imperative that you put some time into the upfront planning to ensure you have a smooth project that runs to budget.

There is no specific formula for working out how much you should invest on your renovations.  The key is to balance how much you can afford with what is important to you.   Ask yourself - Is the value of doing the renovations and having a nicer house worth taking on the financial commitment of paying for the renovations?   We are very emotionally connected to our homes so be mindful of thinking through your decisions and not getting too lost in the emotion.

Once you have a reasonably accurate cost of the project, now you need to fund it.   How much have saved or will have saved by the time your renovations start.  Even though the cost of funding is currently low if you can add it to your mortgage it is always better not to pay interest at all. 

If you do add the cost of renovations to your mortgage its best to add it as a separate mortgage with a shorter time frame.  This is because even though mortgage rates are current around 5.5% if you pay this over a long period of time it adds up. 

Below I’ve got some examples of the total project cost including interest over both 5 years and 25 years.  I’ve also used the cost based on the current interest rates of 5.5% and also 7.5% which is approximately what interest rates have averaged over the long term.

Renovation cost    5.5% over 5 years    5.5% over 25 years    7.5% over 5 years    7.5% over 25 years
$10,000                    $11,460                    $18,431                        $12,022                        $22,188
$25,000                    $28,651                    $46,081                        $30,055                        $55,469
$50,000                    $57,302                    $92,162                        $60,110                        $110,938
$75,000                    $85,953                    $138,243                      $90,165                       $166,407
$100,000                 $114,604                   $184,324                      $120,220                    $221,876

Renovating your home can be an incredibly rewarding.  With careful thought and planning you can ensure it’s doesn’t give you any financial headaches and you can really enjoy the benefits.

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